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Research - APRIL 20, 2018

Investment market for German retail real estate off to modest start to the year

by Andrea Zander

Around €1.6 billion ($1.98 billion) was invested in German retail properties in the first three months of 2018, according to CBRE. Compared with the strong result in the year-earlier quarter, the transaction volume contracted sharply by 56 percent. Measured against the similarly very strong closing quarter of 2017, there is also a significant decline of 68 percent. This is the conclusion drawn in a current analysis prepared by the global commercial real estate services company CBRE.

“The demand for German retail properties by domestic and international investors is ongoing. Investors appreciate the sustainable cash flow stability from retail properties, as shown by the findings of the CBRE EMEA Investor Intentions Survey 2018. Stable economic growth, low unemployment, rising disposable income and sound consumer sentiment in Germany provide the ideal framework conditions for investing in one of Europe’s largest retail markets. The availability of suitable products is the one single factor that is increasingly developing into a constraint,” explained Jan Dirk Poppinga, co-head of retail investment at CBRE Germany. “On top of this, properties are subjected to an in-depth due diligence process before acquisition, which is the reason why investment decisions tend to be protracted,” Poppinga adds.

Investors continue to focus on the retail warehouse and retail park segment that attracted €781 million ($965 million), or 49 percent, of the overall volume in the first three months of 2018. The investment volume in this segment contracted by 55 percent in a year-on-year comparison, due mainly to the lack of large-scale portfolio transactions that contributed to the good performance of this asset class in the first quarter of 2017.

Consequently, single transactions in the size category from €10 million to €20 million ($12.4 million to $24.7 million) dominated market activities. Shopping centers and inner-city commercial buildings followed on: With an investment volume of €379 million and €378 million ($468 million to $467 million), respectively, and a share of a good 24 percent each, these two segments were on a par and shared second place. While a major part of the transaction volume in the shopping center segment was allocated to properties in Germany’s prime locations, the exact reverse was the case with inner-city retail properties. Here investors concentrated on regional centers and B locations, including high street properties in Dresden, Bad Homburg and Regensburg.

 

Top locations with upside potential

The high proportion of top locations in the transaction volume attributable to the shopping center segment made a decisive contribution to significantly boosting the growth of the investment centers overall as well. At €481 million ($594 million) in total, the Top 7 cities accounted for 30 percent of the entire retail investment volume and, at €347 million ($429 million), rose substantially by 39 percent compared with the previous year’s period. Shopping centers contributed 64 percent of the Top 7’s overall volume, followed by high street units with 17 percent and retail warehouses and retail parks with 15 percent. The latter dominated market activity outside the metropolises where, at €708 million ($875 million), the retail warehouse segment accounted for 64 percent of the overall transaction volume, followed by high street properties at €298 million ($368 million) and a share of 27 percent.

 

Low portfolio share curbs transaction volume

Only around 12 percent, equivalent to €191 million ($236 million) of the overall volume, was invested in the context of portfolio transactions, with retail properties being virtually exclusively acquired outside the top locations. In comparison with the year-earlier period (€1.6 billion/$1.98 billion), the share of portfolio sales dropped by 88 percent.

“Virtually no portfolio transactions took place at all in the German market for retail property in the first three months of the new year, a major factor that contributed to the low overall investment volume,” commented Jan Schönherr, co-head of retail investment at CBRE Germany. “Many acquisitions were concluded before the end of the final quarter in 2017, which additionally fueled the dynamic year-end rally. Although new, attractive portfolios of retail properties are being wrapped up, placement and approaching buyers nevertheless takes time. However, given the projects in the pipeline, we assume that the proportion of portfolios will increase considerably again over the course of the year.”

 

Domestic investors continue to build up their portfolios

At the start of the year, domestic investors dominated activities in the German investment market for retail properties. They acquired retail property across Germany worth more than €1 billion ($1.2 billion), thus contributing 66 percent of the overall transaction volume, compared with international players who invested €541 million ($635 million), equivalent to 34 percent. The ratio between domestic and international players, each with a share of 50 percent, held the balance in the previous year. Also on the seller side, the lion’s share, at 62 percent of the transaction volume, was attributable to domestic investors.

“Demand pressure from international investors in particular remains high, especially as the choice of attractive and secure alternative markets is also limited,” said Poppinga. “This does not mean that international investors determine activities on Germany’s investment market, however. On the contrary: In the first quarter, domestic market participants clearly predominated. Two-thirds of the entire transaction volume for retail properties was determined by German investment funds. Consequently, the competition for increasingly scarce investment property continues to intensify.”

Open-ended real estate and special funds accounted for just under 30 percent of the investments in property used for retail purposes across Germany. They invested a total of €463 million ($572 million) and proved to be particularly active in the top locations where they contributed more than half (51 percent) of the transaction volume with funds of €247 million ($305 million). Second place was taken by asset and fund managers who invested €284 million ($350 million, 18 percent), followed by the group of corporates, including various retail companies such as Rewe, Poco or XXXLutz that acquired retail real estate worth €195 million ($240 million, 12 percent). On the seller side, the group of asset and fund managers were also particularly active, selling retail property totaling around €374 million ($462 million), or 24 percent of the sales volume. Developers disposed of properties worth €348 million ($430 million), or 22 percent.

 

Net initial yield initially largely stable

Net initial yields in the retail property segment remained virtually stable across all asset classes compared with the fourth quarter of 2017. Taken as an average across the Top 6 cities, high street properties were unchanged at 3.14 percent. Retail warehouses, supermarkets, hypermarkets and DIY centers stayed at the level of the previous quarter. Only retail parks and first-rate shopping centers in prime locations saw net initial yield decline due to the especially high demand for these segments. For prime retail parks with long-term rental agreements and tenants with excellent credit ratings, prime rent stood at 4.50 percent, while premium shopping centers commanded 3.80 percent.

 

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